The activities of financial institutions, including Forex brokers, binary options and various exchange intermediaries, are controlled by state and non-state institutions. These organizations are called financial regulators, and they exist in every country. The presence of a regulator’s license means that the broker’s activity is in accordance with the law and is regularly monitored. The most respected in the world are the licenses of the American regulator NFA, British FCA and German BaFin. However, most companies operating in the Russian brokerage services market prefer to have a CySEC Cypriot regulator license, although it is not without some drawbacks.
CYSEC – EUROPEAN REGULATOR
The Republic of Cyprus is a member of the European Union; therefore, the activities of financial organizations registered in it are subject to general laws. The Cyprus Securities and Exchange Commission (CySEC) controls financial companies for compliance with the European MiFID Directive. The CySEC license attracts brokerage companies with the simplicity and timing of receipt. FCA and NFA requirements for the quantity and quality of documents submitted are much higher, and the time for considering applications and issuing licenses is longer than that of the Cyprus regulator. The cost of a license is also significantly lower than that of other European and American regulatory organizations. Nevertheless, the reliability of licensed companies is confirmed by many reviews of the Forex club and other brokers.
CySEC Forex brokers are quite authoritative among traders since in order to obtain a license a company must have at least three years of experience in the financial markets. Any client of a regulated company can file a complaint, which will be considered regardless of the number of claims. Moreover, filing a complaint is very simple. This distinguishes CySEC from offshore regulators. The Cyprus regulator may punish controlled companies with fines and license revocation.
CYSEC LICENSE DISADVANTAGES
Nevertheless, it should be recognized that the license has disadvantages affecting the interests of brokers and traders. Based on information from competent market participants and decisions of the regulator itself, five main shortcomings can be distinguished.
Parsing and handling complaints
The Cyprus Commission consists of 13 departments dealing with various areas of financial activity. However, there is no separate body for resolving difficult situations and analyzing complaints about controlled companies. The head and members of the Commission deal with these issues. Decisions to punish the offender are made after one to two months of investigation. You can only file a complaint with a broker if you are unable to resolve the issue in bilateral negotiations. To do this, you need to have documentary evidence: correspondence, answers, a record of negotiations and the like. If the violation of the brokerage company is proven, then the fines are miserable by European standards. This is one of the methods to ensure the attractiveness of the Cyprus license for financial companies. Only recently has the maximum fine for laundering illegal proceeds been raised to 2 million euros.
Difficulties in the process of compensation of funds
If a client of a company regulated by CySEC loses money as a result of the dishonest actions of this company, then it is very difficult, if not impossible, to receive compensation. An investor compensation fund exists, but it is practically not used. The Commission itself does not have the authority for material damages. This is done by the financial ombudsman. But a complaint to CySEC is required to record and monitor the actions of a brokerage company.
In order to file an application with the regulator and the financial ombudsman, you must first file a complaint with your broker. If the broker does not respond within the prescribed period or does not satisfy the requirements of the client, then he has the right to contact the regulator. But payment is possible only in case of bankruptcy of the company or loss of license. Therefore, one should not particularly rely on the regulator and the financial ombudsman. A recent example is the case of IronFX, which delays payments to customers. She was fined a large amount, but she is not deprived of a license and does not recognize her insolvency. Large investors were forced to sue the company and even the CySEC regulator.
Ban on turbo options
Since 2012, CySEC has included binary options in its derivative asset lists. Now it is the only regulator of binary brokers. A new type of financial instrument is used by many Forex brokers with a Cyprus license. The popularity of binary options is confirmed by all Forex reviews. Many traders were attracted by the variety of this tool – turbo options, the execution time of which was 30 or 60 seconds. But recently, the regulator has banned all regulated companies from offering this tool to customers. Brokers lose their income, and traders lose exciting activities. CySEC motivates the ban by saying that the turbo option is not an investment product, but a game of chance.
So bonuses and other rewards beloved by traders are prohibited by the Cyprus regulator. But rather, this is a nuisance for brokers. To attract new customers and stimulate trading volumes, brokers use bonuses, contests, free deals, and other marketing tricks. CySEC recommends using spread reduction to encourage traders. In fact, this is how it turns out since in order to actually receive any bonus it is required to complete a certain number of transactions. The regulator believes that in this way customers are misled.
Compliance with the laws of the region of presence
Tighter European laws have caused changes in Cypriot regulation and have affected the Forex market in Russia. Many Russian companies have a Cyprus license. The network often contains honest reviews about Teletrade, Alpari and other brokers licensed by several regulators. However, some companies operate only under the CySEC license. But since 2018, all regulated brokers are required to disclose their regions of presence and prove that their activities comply with the laws of the country in which they operate.
While there was no law on the regulation of the Forex market in Russia, it did not matter. Now, such companies will have to obtain a license from the Central Bank of the Russian Federation or leave the Russian market. For example, the Alfa-Forex company has stopped serving Russian customers. More serious consequences await companies that operate in dozens of countries. Previously, they could easily serve customers throughout Europe using a Cypriot license.